Taking the Tax Hit

Allison says her husband is receiving a $60,000 lump sum as his commission. They aren't sure how to minimize their tax implications. They have no debt other than their mortgage.

QUESTION: Allison in Dallas says her husband is receiving a $60,000 lump sum as his commission. They aren’t sure how to take it and minimize their tax implications. They have no debt other than their mortgage. Dave explains that they’re going to take a tax hit.

ANSWER: The tax implications are going to be the same unless you were to split the check across into two years. In other words, you’d get some of it in December and some of it in January. Then it might keep you from bracket creeping a little bit.

You’re already in the top tax bracket, so there’s nothing you can do. The government is going to take 40% of this check. They take 40% of your income now because you went out there and won and when you start winning at this level, you must be punished. We have a little bit of a disincentive in our tax code. Some people call it fair. I call it theft.

You’re just going to get a tax hit. Here’s the other problem that’s going to feel even worse. They may withhold on a large lump sum single check even more, but you will at least get it back. The net tax on it is the same as the tax on your income. That’s going to be 40%.

I would go ahead and plan it out and say, “Okay, $60,000 times 40% means the government is going to take $24,000 of it. With the money that’s left, what are we going to do with that?” I always recommend you give some, you save some, and you spend some. You can decide what percentage of what’s left after taxes to give, save, and spend. But always apply a ratio to lump sum checks, and that makes sure you’re always enjoying the money, you’re always investing the money, and you’re always a giver. You’re always giving more, raising your lifestyle—even if it’s slightly, maybe go on a cruise or something, I don’t know, whatever you want to do—and then make sure you have some very intentional giving that you’re doing with it because that keeps you on par on ratios to do the whole thing.

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